Descrepancies between Supply and Demand and Adjustment Processes in the Labour Market

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Abstract

Changes in demand and supply in segments of the labour market will affect the labour market position of workers with an educational background in a related field of study. In one economic tradition such discrepancies between supply and demand are thought to lead to unemployment in the case of excess supply and to unfilled vacancies or skill shortages in the case of excess demand. The other neo&dash;classical oriented tradition expects wage adjustments to take fully account of these labour market imbalances, leading to higher wages for studies with excess demand and lower wages in case of excess supply. In practice the labour market might, on the one hand, be more flexible than suggested by the first approach, but on the other hand adjustment might be incomplete and not only wages but also other aspects of the employment relationship might be affected by a friction between supply and demand. This study examines the relationship between discrepancies between labour demand and supply on the one hand and manifestations of these tensions in the labour market experience of school&dash;leavers on the other hand. To investigate this relationship, a random coefficient model has been used, which allows for different adjustment processes for the various educational types, but still makes full use of all the information available in the data. The analyses provide insights about the importance of different adjustment processes and their complementarity and substitutability. We show that on average, supply surpluses lead to pressure to accept jobs at a level which is lower than the school&dash;leavers educational level, jobs with relatively low wages, and jobs with part&dash;time contracts. A direct link between supply surpluses and unemployment is only found for a few specific fields of study. Unemployment seems to occur mostly when school&dash;leavers do not take temporary jobs or jobs below their educational level in case of excess supply. Copyright Fondazione Giacomo Brodolini and Blackwell Publishers Ltd 2001.

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